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Oil prices could hit a summer slump

If you spent your winter planning a cross-country tour in your new car, you’re probably feeling pretty steamed. Gas hit a low of $2.02 in January, and since then it has crawled up to about $2.73 now.

Oil prices could hit a summer slump
25 May 2015 - 19:09

If you spent your winter planning a cross-country tour in your new car, you’re probably feeling pretty steamed. Gas hit a low of $2.02 in January, and since then it has crawled up to about $2.73 now.

But the rally in oil and gas prices probably won’t last, thanks to abundant production and overflowing stockpiles of both oil and refined products.

The U.S. produced nearly 9.4 million barrels of oil a day the week of May 8, according to the U.S. Energy Administration. “We’re still producing oil at a rate we haven’t seen since Nixon beat McGovern in 1972,” says Tom Kloza, global head of energy analysis at the Oil Price Information Service.

Another 1.2 billion barrels of oil are in storage, and space for more is getting tight. U.S. law prohibits exporting crude oil, with only a few exceptions. And as oil production has slowed modestly, stockpiles of refined products, such as gasoline, are rising, Kloza says.

“Broadly speaking, I’m pessimistic about oil prices,” says Stewart Glickman at S&P Capital IQ. “The recent run-up in prices happened without much material change in fundamentals.” His biggest worry: Independent producers who had been sitting on the sidelines when oil sold for $45 a barrel drilled wells but didn’t complete them. As oil prices rise, they could restart operations, adding to the oversupply.

Adding to the glut: Saudi Arabia has increased its output by 700,000 barrels a day since the fourth quarter of 2014.

Bentek Energy estimates that oil will average $46 for 2015 and $52 for 2016. For drivers, that means that gas prices should start moving down again, Kloza says. “All things being equal, we’re much closer to the peak in gas prices than we are to stasis,” he says.

For investors, it means that oil and gas exploration companies will be vulnerable — especially those that have a high number of high-cost wells. But lower oil prices typically mean higher profits for refineries because the cost of oil is an expense to them. And refiners can export gasoline and other refined products.

The wild card, of course, is hurricane season. “They knock out refineries,” Kloza says. A landfall between Corpus Christi, Texas, and Pascagoula, Miss., could take lots of refinery capacity out suddenly.

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